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2017 (4) TMI 1094 - AT - Income TaxTransfer pricing addition - purchases from AE were inflated - Held that:- The assessee cannot be said to have maintained `a record of the analysis performed to evaluate comparability of uncontrolled transactions with the relevant international transaction’ or `a record of the actual working carried out for determining the arm’s length price, including details of the comparable data and financial information used in applying the most appropriate method, and adjustments, if any.’ Thus, it is unambiguous that the assessee did not undertake any transfer pricing analysis in the manner prescribed. In such circumstances, the TPO was fully justified in holding that the assessee did not maintain any worthwhile documentation or undertake any valid transfer pricing study. All the points taken note of by the ld. CIT(A) in deleting the transfer pricing addition lack valid reasoning and suffer from certain inconsistencies. We, therefore, hold that the impugned order deleing the transfer pricing addition made by the AO, cannot be sustained. Sub-clause (i) deals with the computation of the net operating profit margin realised by the enterprise from an international transaction in relation to costs incurred or sales effected or assets employed or to be employed by the enterprise or having regard to any other relevant base. Sub-clause (ii) provides that the net operating profit margin realised by a comparable uncontrolled transaction should be computed having regard to the same base as that taken in sub-clause (i) for the assessee. In the formula for calculating the profit margin under rule 10B(1)(e) under sub-clauses (i) and (ii), there can be any denominator, such as, costs incurred or sales effected or assets employed or to be employed. However, the numerator is uniform, which is, net operating margin. In fact, the numerator is `operating profit’ and not the `net profit’ as has been taken by the TPO in making transfer pricing adjustment. Whereas, operating profit is the excess of operating revenue over the operating costs, net profit is the excess of revenue over all costs, both operating and non-operating. The Hon’ble Supreme Court in DIT (I.T.) vs. Morgan Stanley and Co. (2007 (7) TMI 201 - SUPREME Court) has held that 'operating profit’ from the international transaction is compared with the operating profit margin of the comparables under the TNMM. Thus the addition based on the transfer pricing adjustment, on the strength of `net profit’ as numerator in contrast to `operating profit’, cannot be upheld. The same is required to be corrected accordingly. Thus in fitness of the things if the impugned order is set aside and the matter is remitted to the file of AO/TPO for a fresh determination of the ALP of the international transaction.
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